M/I Homes, Inc. (MHO)

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M/I Homes Inc. (MHO)

Q2 2008 Earnings Call

July 31 2008 4:00 pm ET

Executives

Phil Creek - EVP and CFO

Bob Schottenstein - CEO and President

Tom Mason - EVP

Ann Marie Hunker- Corporate Controller

Analysts

Ivy Zelman - Zelman & Associates

Alex Barron - Agency Trading Group

David Frank - Wanger Asset Management

Eric Landry - Morningstar

Lee Brady- Wachovia

Presentation

Operator

Good afternoon. My name is [Pei] and I'll be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes second quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) Thank you.

It is now my pleasure to turn the floor over to your host, Phil Creek. Sir, you may begin your conference.

Phil Creek

Thank you very much, and thank you for joining us. On our call is Bob Schottenstein, our CEO and President; Tom Mason, our Executive Vice President; and Ann Marie Hunker, our Corporate Controller.

First, to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because as you know, we are prohibited from discussing significant non-public items with you directly. As to forward-looking statements, this presentation includes forward-looking statements as characterized by the Private Securities Litigation Reform Act of 1995.

Any statements that are not historical in nature are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

Please refer to our most recent 10-K, 10-Q and earnings press releases for other factors that could cause results to differ. Be advised that the company undertakes no obligation to update any forward-looking statements made during this call. The audio of which will be available on our website through July 2009.

With that, I'll now turn the call over to Bob.

Bob Schottenstein

Thanks Phil, and good afternoon, everyone. As stated in today's release, market conditions remain difficult for the home building industry. Demand is weak, consumer confidence at or near a record low, and margins remain under considerable pressure. In many of our markets, conditions frankly have further deteriorated since the beginning of the year. Obviously no one knows when the current cycle will end or when things will begin to turn.

We do believe however, that conditions will remain challenging for the balance of 2008, and in all likelihood through much, if not all, of 2009. And conditions may well deteriorate even further in some markets before we hit bottom. In the face of these extremely challenging, and for the most part unprecedented conditions, we have been engaged in a predominately defensive operating strategy for nearly two and a half years, focused on strengthening our balance sheet, reducing our debt levels, and rightsizing our operations.

We continue to make meaningful and tangible progress on these various defensive minded initiatives, all of which will ensure that M/I Homes is well positioned to take advantage of the future opportunities that will occur once housing conditions began to improve.

During the quarter, we generated $11 million in cash from operations and further reduced our homebuilding bank borrowings. Note at the beginning of 2008, we owed our banks over $115 million on our unsecured revolver. At the end of the second quarter, the balance had been reduced to $10 million and we fully expect that balance to be reduced to zero by year end.

We also were successful during the quarter in reducing our inventory levels. Our total lots owned decreased by 36% in the second quarter. Recurring SG&A is down by nearly 20%, when compared to a year ago, and our headcount, which we have been reducing for more than two years, for the second quarter it was more than 30% below where we stood at last year at this time. At quarters end, our stockholders equity was $466 million and our debt-to-capital ratio is 31%, which is one of the lowest debt levels in the homebuilding industry.

Finally, I want to briefly comment on the recently enacted Federal Legislation in support of housing. While it is by no means a sliver bullet or magic wand, it is clearly a positive and a step in the right direction, which should, and hopefully will, help stabilize things within our industry. As we look ahead, we are confident that we are positioned to weather the current downturn.

Before I turn things back over to Phil, let me just briefly review the situation in our three regions. First, the Midwest region. The Midwest economy remained stagnant, and continues to be challenging. Local housing markets are soft, single-family permits continue to be down. We continue to price competitively, and continue to offer incentives and promotions largely aimed at increasing and promoting consumer confidence.

New contracts and homes delivered for the quarter were down around 25% when compared to 2007. At the end of the quarter, we owned approximately 6,000 lots in the Midwest versus 6,800 lots one year ago. Presently, our gross margins on new orders in the Midwest range from 10% to 15%. I should also note that we had our grand opening in our first community in Chicago this past week, and are very excited about our long range future in Chicago.

The Florida region. Market conditions continued to be challenging there as well, with housing starts and home prices declining. New contracts in Florida are flat when compared to the prior year. There continues to be significant pricing pressures in both Tampa and Orlando. However, cancellation rates for us have normalized and are now under 20%. At the end of the quarter, we own 3,500 lots in Florida versus 8,000 lots a year ago. Our gross margins on new orders in Florida range from 12% to 15%.

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